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Oil’s $128 Billion Handout as Doubts Grow About Fossil Fuels

Kevin Crowley, David Wethe and Mitchell Ferman
Sat, March 4, 2023 

(Bloomberg) -- Worldwide oil demand is racing toward an all-time high and some of the smartest minds in the industry are forecasting $100-a-barrel crude in a matter of months, but US producers are playing the short game and looking to turn over as much cash as possible to investors.

Shareholders in US oil companies reaped a $128 billion windfall in 2022 thanks to a combination of global supply disruptions such as Russia’s war in Ukraine and intensifying Wall Street pressure to prioritize returns over finding untapped crude reserves. Oil executives who in years past were rewarded for investing in gigantic, long-term energy projects are now under the gun to funnel cash to investors who are increasingly convinced that the sunset of the fossil-fuel era is nigh.

For the first time in at least a decade, US drillers last year spent more on share buybacks and dividends than on capital projects, according to Bloomberg calculations. The $128 billion in combined payouts across 26 companies also is the most since at least 2012, and they happened in a year when US President Joe Biden unsuccessfully appealed to the industry to lift production and relieve surging fuel prices. For Big Oil, rejecting the direct requests of the US government may never have been more profitable.

At the heart of the divergence is growing concern among investors that demand for fossil fuels will peak as soon as 2030, obviating the need for mutlibillion-dollar megaprojects that take decades to yield full returns. In other words, oil refineries and natural-gas fired power plants — along with the wells that feed them — risk becoming so-called stranded assets if and when they are displaced by electric cars and battery farms.



“The investment community is skeptical of what assets and energy prices will be,” John Arnold, the billionaire philanthropist and former commodities trader, said during a Bloomberg News interview in Houston. “They would rather have the money through buybacks and dividends to invest in other places. The companies have to respond to what the investment community is telling them to do otherwise they're not going to be in charge very long.”

The upsurge in oil buybacks is helping drive a broader US corporate spending spree that saw share-repurchase announcements more than triple during the first month of 2023 to $132 billion, the highest ever to begin a year. Chevron Corp. alone accounted for more than half that total with a $75 billion, open-ended pledge. The White House lashed out and said that money would be better spent on expanding energy supplies. A 1% US tax on buybacks takes effect later this year.

Global investment in new oil and gas supplies already is expected to fall short of the minimum needed to keep up with demand by $140 billion this year, according to Evercore ISI. Meanwhile, crude supplies are seen growing at such an anemic pace that the margin between consumption and output will narrow to just 350,000 barrels a day next year from 630,000 in 2023, according to the US Energy Information Administration.

“The companies have to respond to what the investment community is telling them to do otherwise they're not going to be in charge very long.” — Billionaire John Arnold

Management teams from the biggest US oil companies recommitted to the investor-returns mantra as they unveiled fourth-quarter results in recent week and the 36% slump in domestic oil prices since mid-summer has only reinforced those convictions. Executives across the board now insist that funding dividends and buybacks takes priority over pumping additional crude to quell consumer discontent over higher pump prices. This may pose a problem in a matter of months as Chinese demand accelerates and global fuel consumption hits an all-time high.

“Five years ago, you would have seen very significant year-on-year oil-supply growth, but you’re not seeing that today,” Arnold said. “It’s one of the bull stories for oil — that the supply growth that had come out of the US has now stopped.”

The US is crucial to global crude supply not just because it’s the world’s biggest oil producer. Its shale resources can be tapped much more quickly than traditional reservoirs, meaning that the sector is uniquely placed to respond to price spikes. But with buybacks and dividends swallowing up more and more cash flow, shale is no longer the global oil system’s ace in the hole.

In the waning weeks of 2022, shale specialists reinvested just 35% of their cash flow in drilling and other endeavors aimed at boosting supplies, down from more than 100% in the 2011-2017 period, according to data compiled by Bloomberg. A similar trend is evident among the majors, with Exxon Mobil Corp. and Chevron aggressively ramping buybacks while restraining capital spending to less than pre-Covid levels.

Investors are driving this behavior, as evidenced by clear messages sent to domestic producers in the past two weeks. EOG Resources Inc., ConocoPhillips and Devon Energy Corp. dropped after announcing higher-than-expected 2023 budgets while Diamondback Energy Inc., Permian Resources Corp. and Civitas Resources Inc. all rose as they kept spending in check.

On top of shareholder demands for cash, oil explorers also are grappling with higher costs, lower well productivity and shrinking portfolios of top-notch drilling locations. Chevron and Pioneer Natural Resources Co. are two high-profile producers reorganizing drilling plans after weaker-than-expected well results. Labor costs also are rising, according to Janette Marx, CEO of Airswift, one of the world’s biggest oil recruiters.

US oil production is expected to grow just 5% this year to 12.5 million barrels a day, according to the Energy Information Administration. Next year, the expansion is expected to slow to just 1.3%, the agency says. While the US is adding more supply than most of the rest of the world, it’s a marked contrast to the heady days of shale in the previous decade when the US was adding more than 1 million barrels of daily output each year, competing with OPEC and influencing global prices.

Demand, rather than supply-side actors like the American shale sector or OPEC, will be the primary driver of prices this year, Dan Yergin, Pulitzer Price-winning oil historian and vice chairman of S&P Global, said during an inteview.

“Oil prices will be determined by, metaphorically speaking, Jerome Powell and Xi Jinping,” Yergin said, referring to the Federal Reserve’s rate-hike path and China’s post-pandemic recovery. S&P Global expects global oil demand to reach an all-time high of 102 million barrels per day.

With the case for higher oil prices building, US President Joe Biden has fewer tools at his disposal with which to counteract the blow to consumers. The president already has tapped the Strategic Petroleum Reserve to the tune of 180 million barrels in a bid to ease gasoline prices as they were spiking in 2022. Energy Secretary Jennifer Granholm is likely to get a frosty reception at the CERAWeek by S&P Global event in Houston staring March 6 if she follows Biden’s lead and attacks the industry for giving too much back to investors. That business model is “here to stay,” said Dan Pickering, chief investment officer of Pickering Energy Partners.

“There’s going to be a point at which the US needs to produce more because the market is going to demand it,” Pickering said. “That’s probably when investor sentiment shifts to growth. Until then, returning capital seems like the best idea.”

--With assistance from Lu Wang and Tom Contiliano.